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JOY > SEC Filings for JOY > Form 10-K on 13-Dec-2013All Recent SEC Filings

Show all filings for JOY GLOBAL INC

Form 10-K for JOY GLOBAL INC


13-Dec-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes. References made to years are for fiscal year periods. Dollar amounts are in thousands, except per-share data and as otherwise indicated.
The purpose of this discussion and analysis is to enhance the understanding and evaluation of the results of operations, financial position, cash flows, indebtedness and other key financial information of Joy Global Inc. and its subsidiaries for fiscal 2013, 2012 and 2011. For a more complete understanding of this discussion, please read the Notes to Consolidated Financial Statements included in this report.

Overview We are a leading manufacturer and servicer of high productivity mining equipment for the extraction of coal and other minerals and ores. We manufacture and market original equipment and aftermarket parts and services for both underground and surface mining and certain industrial applications. Our equipment is used in major mining regions throughout the world to mine coal, copper, iron ore, oil sands, gold and other minerals. We operate in two business segments: Underground Mining Machinery and Surface Mining Equipment. We are a major manufacturer of underground mining machinery for the extraction of coal and other bedded minerals and offer comprehensive service locations near major mining regions worldwide. We are also a major producer of surface mining equipment for the extraction of ores and minerals and we provide extensive operational support for many types of equipment used in surface mining. Our principal manufacturing facilities are located in the United States, including facilities in Pennsylvania, Wisconsin, Texas and Alabama, and internationally, including facilities in China, the United Kingdom, South Africa and Australia. Acquisition of LeTourneau


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On June 22, 2011, we purchased LeTourneau for approximately $1.1 billion. LeTourneau designs, builds and supports equipment for the mining industry and has been a leader in the earthmoving equipment industry since the 1920s. LeTourneau historically operated in three business segments: mining equipment, steel products and drilling products.
On October 24, 2011, we completed the sale of LeTourneau's drilling products business to Cameron International Corporation for $375.0 million in cash, subject to a post-closing working capital adjustment of $56.3 million that we paid in fiscal 2012. We entered into a Transition Manufacturing and Supply Agreement to allow for the orderly transfer of drilling products production from Longview, Texas and a Steel Supply Agreement to allow the buyer time to develop other sources. In conjunction with our entrance into the Transition Manufacturing and Supply Agreement, we recognized an upfront loss and related liability of $23.3 million for unreimbursable manufacturing costs. The liability was utilized and adjusted during fiscal 2013 and 2012 to reflect actual results of performance under the agreement. The agreement expired in fiscal 2013. The results of operations for LeTourneau are included in the accompanying consolidated financial statements, with the mining equipment and steel products businesses included in our Surface Mining Equipment segment and the drilling products business reflected as results of discontinued operations. Acquisition of International Mining Machinery On December 29, 2011, we acquired a controlling interest in IMM, a leading designer and manufacturer of underground coal mining equipment in China. In fiscal 2012, we acquired the remaining shares of IMM through a tender offer and subsequent compulsory acquisition of the untendered shares.
Prior to obtaining control on December 29, 2011, we accounted for our investment in IMM under the equity method. Upon obtaining control, we applied the acquisition method of accounting, re-measured the preexisting interest at fair value and recorded a gain of $19.4 million. The gain is reported in the Consolidated Statement of Income under the heading Other income for the year ended October 26, 2012. The results of operations for IMM have been included in the accompanying financial statements from December 29, 2011 forward as part of the Underground Mining Machinery segment. Prior to obtaining control, our share of income from IMM was reported in the Consolidated Statements of Income under the heading Other income and included in Corporate. Operating Results
Net sales for fiscal 2013 were $5.0 billion, compared to $5.7 billion in fiscal 2012. The 11.5% decrease in net sales in the current year included a $455.5 million decrease in original equipment sales and a $192.6 million decrease in aftermarket sales. The decrease in sales was driven by declining order rates and weak market conditions. Original equipment sales decreased in all regions except Africa and South America, which increased by $81.0 million and $31.0 million, respectively. Aftermarket sales decreased in all regions except South America, which increased by $29.3 million. Compared to the prior year, net sales in fiscal 2013 included an $88.0 million unfavorable effect of foreign currency translation.
Operating income in fiscal 2013 was $821.7 million or 16.4% of net sales, compared to $1.2 billion or 20.7% of net sales in fiscal 2012. The 29.9% decrease in operating income in the current year is due to lower volumes of $263.0 million, unfavorable product mix of $28.0 million, less favorable manufacturing cost absorption of $39.2 million and a non-cash impairment of certain acquired trademarks of $155.2 million. These items were partially offset by favorable period costs of $76.3 million, which includes a $44.9 million decrease in excess purchase accounting costs and a $12.5 million decrease in costs from the prior year pension curtailment, and reduced product development, selling and administrative expenses of $56.8 million, which includes a $15.4 million decrease in acquisition costs and a $19.1 million increase in restructuring costs. In addition, there was a $1.4 million increase in other income, which includes a successful claim settlement in the fourth quarter of $15.0 million and a successful acquisition settlement in the fourth quarter of $13.5 million associated with IMM, partially offset by the prior year gain of $19.4 million on the re-measurement of our interest in IMM upon obtaining a controlling interest. Compared to the prior year, operating income in fiscal 2013 included a $21.4 million unfavorable effect of foreign currency translation.
Income from continuing operations attributable to Joy Global Inc. was $533.9 million, or $4.99 per diluted share, in fiscal 2013 compared to $767.1 million, or $7.18 per diluted share, in fiscal 2012.
Bookings for fiscal 2013 were approximately $3.9 billion, compared to $5.1 billion in fiscal 2012. The 22.6% decrease in bookings in the current year is made up of a $779.6 million decrease in original equipment bookings and a $366.9 million decrease in aftermarket bookings. The decrease in bookings was driven by weak market conditions. Original equipment bookings decreased in all regions except Eurasia, which increased by $82.7 million. Significant original equipment projects greater than $100.0 million included in orders in fiscal 2013 were $271.0 million, compared to $381.0 million in fiscal 2012. Aftermarket bookings decreased in all regions. Compared to the prior year, bookings in fiscal 2013 included a $162.2 million unfavorable effect of foreign currency translation, due primarily to the decline in the value of the Australian dollar and South African rand relative to the U.S. dollar.


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                             Results of Operations
Fiscal 2013 Compared With Fiscal 2012
Sales
The following table sets forth fiscal 2013 and 2012 net sales as derived from
our Consolidated Statements of Income:
In thousands                     2013            2012          $ Change     % Change
Net Sales
Underground Mining Machinery $ 2,691,039     $ 3,107,488     $ (416,449 )    (13.4 )%
Surface Mining Equipment       2,494,678       2,737,488       (242,810 )     (8.9 )%
Eliminations                    (173,020 )      (184,087 )       11,067
Total                        $ 5,012,697     $ 5,660,889     $ (648,192 )    (11.5 )%

Underground Mining Machinery net sales for fiscal 2013 were $2.7 billion, compared to $3.1 billion in fiscal 2012. Original equipment sales decreased by $245.5 million, or 16.2%, during the year, and aftermarket sales decreased by $170.9 million, or 10.8%. The decrease in sales was driven by declining order rates and weak market conditions. Original equipment sales were stronger in Africa by $36.8 million, offset by declines in all other regions. Aftermarket sales declined in all regions except Australia, which increased by $6.2 million. Foreign currency translation unfavorably impacted sales by $71.4 million. Surface Mining Equipment net sales for fiscal 2013 were $2.5 billion compared to $2.7 billion in fiscal 2012. Original equipment sales decreased by $212.5 million, or 16.6%, during the year, and aftermarket sales decreased by $30.3 million, or 2.1%. The decrease in sales was driven by declining order rates and weak market conditions. Original equipment sales increases in South America and Africa of $31.0 million and $44.2 million, respectively, were more than offset by declines in all other regions. Aftermarket growth in South America and Eurasia of $29.3 million and $11.6 million, respectively, was more than offset by lower aftermarket sales in all other regions. Foreign currency translation unfavorably impacted sales by $16.6 million. Operating Income
The following table sets forth fiscal 2013 and 2012 operating income as derived from our Consolidated Statements of Income:

                                                      2013                                    2012
                                          Operating                               Operating
In thousands                            Income (Loss)       % of Net Sales      Income (Loss)      % of Net Sales
Operating Income (Loss)
Underground Mining Machinery         $       367,233               13.6 %     $       671,797             21.6 %
Surface Mining Equipment                     525,314               21.1 %             592,687             21.7 %
Corporate Expenses                           (25,652 )                                (51,079 )
Eliminations                                 (45,234 )                                (40,846 )
Total                                $       821,661               16.4 %     $     1,172,559             20.7 %

Underground Mining Machinery operating income for fiscal 2013 was $367.2 million, compared to $671.8 million in fiscal 2012. Operating income was unfavorably impacted by $173.9 million due to lower volumes, $31.5 million due to unfavorable product mix, $15.3 million due to less favorable manufacturing cost absorption, $3.5 million due to reduced other income and $130.2 million due to a non-cash impairment of certain acquired trademarks. These items were partially offset by $30.5 million due to favorable period costs, which includes a $31.2 million decrease in excess purchase accounting costs and a $2.1 million decrease in costs from the prior year pension curtailment, and $19.3 million due to reduced product development, selling and administrative expenses, despite a $13.3 million increase in restructuring costs. Foreign currency translation unfavorably impacted operating income by $19.4 million.
Surface Mining Equipment operating income for fiscal 2013 was $525.3 million, compared to $592.7 million in fiscal 2012. Operating income was unfavorably impacted by $92.3 million due to lower volumes, $23.9 million due to less favorable manufacturing cost absorption, $3.4 million due to reduced other income and $25.0 million due to a non-cash impairment of certain acquired trademarks. These items were partially offset by $11.1 million due to favorable product mix, $45.8 million due to favorable period costs, which includes a $13.7 million decrease in excess purchase accounting costs and a $10.4 million decrease in costs from the prior year pension curtailment, and $20.4 million due to reduced product development, selling and administrative expenses,


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which includes a $6.8 million increase in restructuring costs. Foreign currency translation unfavorably impacted operating income by $2.0 million. Corporate expense for fiscal 2013 was $25.7 million, compared to $51.1 million in fiscal 2012. The decrease in corporate expense is primarily due to a decrease in acquisition costs of $15.4 million, a decrease in restructuring costs of $1.0 million, a successful claim settlement in the fourth quarter of $15.0 million and a successful acquisition settlement in the fourth quarter of $13.5 million associated with IMM. These items were partially offset by the prior year gain of $19.4 million on the re-measurement of our interest in IMM upon obtaining a controlling interest.
Product Development, Selling and Administrative Expense Product development, selling and administrative expense for fiscal 2013 was $680.0 million, or 13.6% of sales, compared to $736.8 million, or 13.0% of sales, in fiscal 2012. Product development expense decreased by $8.0 million, which was driven by reduced headcount and other cost reduction actions, as well as recoveries related to longwall deliveries and development activity. Selling expense decreased by $22.6 million due to lower pension expense, lower commissions from lower sales volumes, decreased amortization of intangibles and reduced headcount and other cost reduction actions. Administrative expense decreased by $26.1 million due primarily to lower acquisition costs, lower pension and bad debt expenses, lower performance based compensation and reduced headcount and other cost reduction actions. These administrative expenses were partially offset by increased restructuring charges.
In addition, in the fourth quarter of fiscal 2013, we reviewed our brand portfolio and developed a strategy to increase the visibility of our core brands in furtherance of our One Joy Global initiative. During this review, we determined that the indefinite life assumption was no longer appropriate for most of our previously acquired trademarks. As a result, a non-cash impairment charge of $155.2 million was recorded in the fourth quarter of fiscal 2013, of which $130.2 million was recorded by our Underground Mining Machinery segment and $25.0 million was recorded by our Surface Mining Equipment segment. This impairment charge is not expected to result in future cash outflows to the Company.
Net Interest Expense
Net interest expense for fiscal 2013 was $57.5 million, compared to $67.4 million in fiscal 2012. The decrease in net interest expense is primarily due to higher borrowings in the prior year and generally lower short-term rates. In February 2012, we drew a term loan of $250.0 million in conjunction with the IMM tender offer. This loan was repaid in October 2012. Provision for Income Taxes
Income tax expense for fiscal 2013 was $230.2 million, compared to $337.9 million in fiscal 2012. The effective income tax rate from continuing operations was 30.1% for fiscal 2013, compared to 30.6% in fiscal 2012. The main drivers of the variance in tax rates when compared to the statutory rate of 35.0% were the geographic mix of earnings with the corresponding net favorable differences in foreign statutory tax rates and benefits related to the deduction received for U.S. manufacturing activities.
Net discrete tax benefits of $5.2 million were recorded in fiscal 2013, compared to net discrete tax benefits of $7.6 million in 2012. Bookings
Bookings represent the cumulative amount of new customer orders for original equipment and aftermarket products and services, exclusive of long-term maintenance and repair arrangements and life cycle management arrangements awarded to us during the reporting period. Customer orders included in bookings represent arrangements to purchase specific original equipment, products or services by customers who have satisfied our credit review procedures. We record bookings when firm orders are received and add the bookings to our backlog. Bookings for fiscal 2013 and 2012 are as follows:

In thousands                     2013            2012           $ Change      % Change
Bookings
Underground Mining Machinery $ 2,301,059     $ 2,780,799     $   (479,740 )    (17.3 )%
Surface Mining Equipment       1,779,827       2,474,003         (694,176 )    (28.1 )%
Eliminations                    (156,019 )      (183,463 )         27,444
Total Bookings               $ 3,924,867     $ 5,071,339     $ (1,146,472 )    (22.6 )%

Underground Mining Machinery bookings for fiscal 2013 were $2.3 billion, compared to $2.8 billion in fiscal 2012. Original equipment bookings decreased by $210.2 million, or 17.3%, during the year, and aftermarket bookings decreased by $269.5 million, or 17.3%. The decrease in bookings was driven by weak market conditions. Original equipment orders decreased in all


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regions except Eurasia, which increased by $20.4 million, and aftermarket orders decreased in all regions. Foreign currency translation unfavorably impacted bookings by $123.8 million, due primarily to the decline in the value of the Australian dollar and South African rand relative to the U.S. dollar. Surface Mining Equipment bookings for fiscal 2013 were $1.8 billion, compared to $2.5 billion in fiscal 2012. Original equipment bookings decreased by $582.6 million, or 56.7%, during the year, and aftermarket bookings decreased by $111.6 million, or 7.7%. The decrease in bookings was driven by weak market conditions. Original equipment and aftermarket orders decreased in all regions except Eurasia, for which original equipment sales increased by $62.4 million and aftermarket sales increased by $12.7 million. Foreign currency translation unfavorably impacted bookings by $38.4 million, due primarily to the decline in the value of the Australian dollar and South African rand relative to the U.S. dollar.
Fiscal 2012 Compared With Fiscal 2011
Sales
The following table sets forth fiscal 2012 and 2011 net sales as derived from our Consolidated Statements of Income:

In thousands                     2012            2011          $ Change      % Change
Net Sales
Underground Mining Machinery $ 3,107,488     $ 2,576,625     $   530,863        20.6 %
Surface Mining Equipment       2,737,488       1,959,353         778,135        39.7 %
Eliminations                    (184,087 )      (132,072 )       (52,015 )
Total                        $ 5,660,889     $ 4,403,906     $ 1,256,983        28.5 %

Underground Mining Machinery net sales for fiscal 2012 were $3.1 billion, compared to $2.6 billion in fiscal 2011, and included a $136.2 million increase in aftermarket sales, a $175.7 million increase in original equipment sales and $219.0 million in sales from the acquisition of IMM. Aftermarket sales increased in China and Australia by $111.5 million and $46.6 million, respectively, primarily due to increased demand for parts. Original equipment sales increased in Australia and Eurasia by $214.8 million and $36.0 million, respectively, primarily due to increased roof support sales in both regions and increased bolter miner and conveyor system sales in Australia. The increase in original equipment sales from Australia and Eurasia was partially offset by decreases in sales from China and North America. Foreign currency translation unfavorably impacted sales by $39.7 million.
Surface Mining Equipment net sales for fiscal 2012 were $2.7 billion, compared to $2.0 billion in fiscal 2011, and included a $93.8 million increase in aftermarket sales, a $377.9 million increase in original equipment sales and a $306.4 million increase in sales from the acquisition of LeTourneau. Aftermarket sales increased in all regions except China primarily due to increased demand for parts. Original equipment sales increased in all regions except Africa, primarily due to last year's strong order rate flowing to this year's sales. Foreign currency translation unfavorably impacted sales by $11.7 million. Operating Income
The following table sets forth fiscal 2012 and 2011 operating income as derived from our Consolidated Statements of Income:

                                                     2012                                    2011
                                         Operating                               Operating
In thousands                           Income (Loss)      % of Net Sales       Income (Loss)       % of Net Sales
Operating Income (Loss)
Underground Mining Machinery         $       671,797             21.6 %     $       595,262               23.1 %
Surface Mining Equipment                     592,687             21.7 %             422,472               21.6 %
Corporate Expense                            (51,079 )                              (65,693 )
Eliminations                                 (40,846 )                              (31,862 )
Total                                $     1,172,559             20.7 %     $       920,179               20.9 %

Underground Mining Machinery operating income for fiscal 2012 was $671.8 million, compared to $595.3 million in fiscal 2011. Underground Mining Machinery return on sales was reduced by 1.3 points from fiscal 2011 due to IMM, including the non-recurring purchase accounting charges of $27.4 million from the acquisition. In addition to the $9.4 million attributable to IMM, operating income was favorably impacted by $127.1 million due to higher sales volumes, which was partially offset by $23.2 million of increased period costs, $6.5 million of restructuring costs and $2.1 million due to pension curtailment and special termination benefit charges. Foreign currency translation unfavorably impacted operating income by $11.5 million.


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Surface Mining Equipment operating income for fiscal 2012 was $592.7 million, compared to $422.5 million in fiscal 2011. Operating income increased $50.6 million from the acquisition of LeTourneau. LeTourneau's 2012 and 2011 operating income was reduced by $13.7 million and $8.8 million, respectively, for non-recurring purchase accounting charges. In addition to the $50.6 million increase from LeTourneau, operating income was favorably impacted by $148.3 million due to higher sales volumes, which was partially offset by $37.2 million of increased period costs, $10.3 million due to pension curtailment and special termination benefit charges and $2.4 million of restructuring charges. Corporate expense for fiscal 2012 was $51.1 million, compared to $65.7 million in fiscal 2011. The decrease in corporate expense is primarily due to the IMM remeasurement gain of $19.4 million upon obtaining a controlling interest in IMM in December 2011.
Product Development, Selling and Administrative Expense Product development, selling and administrative expense for fiscal 2012 was $736.8 million, or 13.0% of sales, compared to $602.0 million, or 13.7% of sales, in fiscal 2011. The increase in product development, selling and administrative expense is due in part to the expenses associated with LeTourneau and IMM. The inclusion of LeTourneau and IMM increased product development, selling and administrative expenses by $74.6 million. In addition to the $74.6 million attributable to the acquisitions' operations, product development costs increased by an additional $9.6 million, driven by research and development activities on new or existing products and increased personnel for smart services activities. Selling costs increased by $13.3 million to support increased sales volumes and aftermarket infrastructure. The increase in administrative expenses of $37.1 million relates to restructuring charges of $9.9 million and increased performance based compensation of $8.0 million. Net Interest Expense
Net interest expense for fiscal 2012 was $67.4 million, compared to $24.3 million in fiscal 2011. The increase in net interest expense is primarily due to borrowings used to fund the acquisitions. We entered into a $500.0 million term loan dated June 16, 2011 for the acquisition of LeTourneau, issued $500.0 million of Senior Notes on October 12, 2011 in anticipation of completing the IMM transaction and we drew on an additional term loan of $250.0 million for the acquisition of IMM on February 10, 2012. Provision for Income Taxes
Income tax expense for fiscal 2012 was $337.9 million, compared to $264.8 million in fiscal 2011. The effective income tax rate from continuing operations was 30.6% for fiscal 2012, compared to 29.6% in fiscal 2011. The main drivers of the variance in tax rates when compared to the statutory rate of 35% were the geographic mix of earnings with the corresponding net favorable differences in foreign statutory tax rates.
Net discrete tax benefits of $7.6 million were recorded for fiscal 2012, compared to net discrete tax benefits of $5.4 million in fiscal 2011. Bookings
Bookings represent the cumulative amount of new customer orders for original equipment and aftermarket products and services, exclusive of long-term maintenance and repair arrangements and life cycle management arrangements awarded to us during the reporting period. Customer orders included in bookings represent arrangements to purchase specific original equipment, products or services by customers who have satisfied our credit review procedures. We record bookings when firm orders are received and add the bookings to our backlog. Bookings for fiscal 2012 and fiscal 2011 are as follows:

In thousands                     2012            2011          $ Change     % Change
Bookings
Underground Mining Machinery $ 2,780,799     $ 3,102,288     $ (321,489 )    (10.4 )%
Surface Mining Equipment       2,474,003       2,635,992       (161,989 )     (6.1 )%
Eliminations                    (183,463 )      (146,841 )      (36,622 )
Total Bookings               $ 5,071,339     $ 5,591,439     $ (520,100 )     (9.3 )%

Underground Mining Machinery bookings for fiscal 2012 were $2.8 billion, compared to $3.1 billion in 2011. Original equipment bookings decreased by $316.6 million, or 20.6%, during the year, and aftermarket bookings decreased by $4.9 million, or 0.3%. When excluding the $217.6 million impact of the IMM acquisition, original equipment bookings decreased in all regions except for Africa due to the weakening coal market in the U.S. and China, as well as significant orders from customers in Australia and Russia in the prior year that did not repeat in 2012. Aftermarket bookings were substantially flat compared to the prior year.


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Increases in aftermarket bookings in China, Africa and Australia were partially offset by declining orders in the U.S. and Eurasia. Foreign currency translation unfavorably impacted bookings by $79.4 million.
Surface Mining Equipment bookings for fiscal 2012 were $2.5 billion, compared to $2.6 billion in 2011. Original equipment bookings decreased by $278.1 million, or 21.3%, during the year, and aftermarket bookings increased by $116.2 million, or 8.7%. Original equipment orders included an incremental $236.3 million from the acquisition of LeTourneau. These bookings were down in all regions except Africa and Australia due to weaker markets. Aftermarket bookings increased in . . .

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